Loan against
property, or LAP, a popular way of raising money on a short notice for
entrepreneurs, businessmen and individuals, seems to be running into rough
weather. A recent report from India Ratings says there have been raising
delinquencies - as much as 30 per cent in the case of some lenders - due to
stagnancy in prices and dilution of risk mitigation practices. For instance,
there is an increasing trend of accepting non-residential properties and
unoccupied residential property. While selling, these might fetch lower value.
Loan against
property is typically availed of by self-employed businessmen, professionals
and entrepreneurs for business purposes. With the backing of a property, both
banks and non-banking financial companies (NBFCs) are comfortable with it.
However, borrowers seeking loans through this route should remember only a
portion - 60 to 65 per cent - of the property value will be granted to them. In
the case of a property on which a borrower is already paying a housing loan,
the bank or NBFC will consider the rise in value and lend the same percentage.
For example: If the property price has risen from Rs 50 lakh to Rs 65 lakh, a
borrower can get loan of Rs 9-10 lakh. In a joint property, lenders might
insist all joint owners be co-borrowers.
According to
Manavjeet Singh, chief executive officer and founder of Rubique, an online
marketplace for financial products, borrowers also need to be blamed for the
stress because they are going for balance transfers aggressively to get higher
loan amounts. "There are a lot of balance transfers, as borrowers look for
cheaper rates and higher loan amounts. They are able to get these due to the
high competition. The stress, then, begins to show when property prices remain
stagnant or come down,'' he says.
Sumit Bali,
head, personal assets, Kotak Mahindra Bank, says, "Borrowers should be
clear that the property be leveraged only to raise money for business. Raising
more money is raising more debt and that will put pressure on cash flows.''
Interest
rates on loan against property are 10-12.5 per cent for banks and from 10.6 to
22 per cent in the case of NBFCs. The final rate depends on the type of
property (residential, commercial, industrial) and the borrower's profile and
repayment capability. Usually, loans are given up to a period of 10-15 years.
The amounts available are as low as Rs 25,000 and as high as Rs 5 crore.
Typically, ticket sizes are Rs 60-1 crore.
"Over
the past 10 years, property prices have become meaningful. It is possible for
small businesses to finance about 40 per cent of their capex (capital expenditure)
through loan against property.
But, the loan should be used for productive purposes. Only then will money come
back to the business,'' says Ashwini Hooda, deputy managing director,
Indiabulls Housing Finance.
Getting a loan isn't very easy
Anyone who
has a property in their name can get a loan against it. Lenders may seek the
end-use of the loan before sanctioning it. Properties considered include
self-occupied-residential property/commercial property, self-occupied rented,
self-occupied-vacant property and industrial property. The lender's legal team
verifies the title and the technical team verifies the value of the property,
the construction and whether it is built in line with the by-laws. Indiabulls
Housing Finance, for instance, gives loans only against a borrower's primary
residential property. In addition, the business has to be to seasoned for seven
to 10 years and the borrower should generate enough income from the business to
be able to service the loan, Hooda says.
"We
refrain from giving funds for speculative purposes. Collateral is the only
security if a customer defaults. The underlying cash flow is also assessed,''
says Bali.
Documentation required
What is
required include property documents, sanction plan of the property and
completion certificate. Lenders have lawyers who check the legality and
marketability.
They also
have a valuation agency which provides a report and also does a check on
construction and the sanctioned plan. Based on the report from lawyer and
valuation agency, the loan is sanctioned.
Individuals
have to show salary slips for the past six months, bank statements to show
income for six months and proof of income tax paid. For the self-employed or
professionals, certified financial statements for three years and bank
statements for the past six months are asked. Existing loans and credit rating
are also checked. Some lenders insist the borrower buys property insurance
before sanctioning the loan.
"The
loan will not be sanctioned unless the property has a clear title deed and until
the lender is convinced the documents are genuine,'' says Singh. In the case of
businesses, banks and NBFCs look at the Ebitda (earnings before interest, tax,
depreciation and amortization) margins, debt-equity ratio and income tax
returns to ascertain the cash flows.
Valuation may vary
Most lenders
typically give 60-65 per cent of the property value as loan. This vary,
depending on the kind of property, borrower's record, etc. The valuation is
done by valuation agencies appointed by lenders. The value is arrived at by
considering circle rates, age of the property, quality of construction, etc.
